Pakistan’s banking sector is expected to remain heavily dependent on government borrowing during the current fiscal year as lending opportunities within the private sector continue to remain limited. According to financial industry sources, commercial banks are likely to maintain their preference for investing in government securities, allowing them to generate stable returns while extending comparatively less financing to businesses and small and medium enterprises (SMEs). The trend is expected to continue despite repeated calls from the State Bank of Pakistan (SBP) and the federal government to increase lending that supports economic growth.
Banking executives believe the lending environment is unlikely to improve significantly during FY2027. A senior banker stated that the conditions affecting private sector financing remain largely unchanged from the previous fiscal year. According to industry representatives, unless business investment strengthens considerably, banks will continue allocating a larger share of their available funds to government borrowing rather than commercial lending. This approach continues to make the banking sector one of the strongest performing industries for investors seeking stable financial returns.
Government borrowing from commercial banks continued to increase during FY2026 despite improvements in tax collection. Although the Federal Board of Revenue (FBR) achieved its revised annual revenue target, federal borrowing from banks increased to Rs5.9 trillion compared with Rs5.4 trillion during FY2025. As domestic debt continued to grow, almost half of the government’s revenue was directed towards servicing interest payments, highlighting the growing fiscal burden associated with public borrowing.
Industry participants believe this borrowing pattern is unlikely to change during the current fiscal year. Bankers expect private sector financing to remain below potential levels, with businesses possibly receiving even less credit than the approximately Rs1.4 trillion extended during FY2026. According to banking officials, a stronger recovery in manufacturing activity or increased business investment could improve lending demand, but current economic conditions provide little indication that such a recovery will occur in the near term.
Financial experts argue that the government’s continued reliance on domestic borrowing is linked to persistent fiscal financing requirements. According to banking industry sources, annual federal budgets continue to include funding gaps that are ultimately financed through additional borrowing or new taxation measures. As long as these financing requirements persist, commercial banks are expected to continue directing a substantial share of their deposits towards government securities, which provide lower risk and predictable returns.
The banking sector’s lending patterns are also reflected in key financial indicators. The advance-to-deposit ratio declined to 35.2 percent in June 2026 from 38.1 percent a year earlier. Analysts describe this as one of the lowest ratios in the region, indicating that a relatively small portion of bank deposits is being converted into loans for businesses and consumers. At the same time, the country’s domestic debt continues to generate interest payments estimated at around Rs8 trillion annually.
During FY2026, both the State Bank of Pakistan and the federal government repeatedly encouraged banks to expand financing for the private sector, particularly for small and medium enterprises, as part of broader efforts to improve economic activity and lift national growth beyond 4 percent. Despite these policy objectives, government borrowing significantly exceeded lending to businesses, with approximately Rs5.9 trillion borrowed by the public sector compared with around Rs1.4 trillion provided to private sector borrowers.
According to money market expert S. S. Iqbal, Pakistan’s relatively low domestic investment levels continue to reduce demand for commercial bank financing. He noted that the country’s investment activity remains among the weakest in the region, limiting opportunities for banks to expand business lending. He also pointed to continuing regional uncertainty resulting from the ongoing five-month conflict as another factor discouraging domestic investors from taking on relatively expensive bank financing.
Another indicator highlighting banks’ investment preferences is the investment-to-deposit ratio, which stood at 104.2 percent in June 2026 compared with 106 percent a year earlier. The ratio illustrates that commercial banks continue to invest a substantial portion of their available funds in government securities rather than expanding lending to productive sectors of the economy. Industry observers believe this trend is likely to continue until stronger business confidence, higher private investment and improved economic conditions create greater demand for commercial credit across Pakistan’s economy.
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